Retail: Corruption and Red Tape delay Wal-Mart Entry

July 09: While the Indian wine industry has been known to be reeling from factors like corruption and red tape inherent in the Indian system besides high taxes, none of the global supermarkets like Wal-Mart have applied for opening Retail stores even nine months after the liberal FDI Policy was announced, citing corruption and red tape inherent in the Indian States as major deterrents among several factors

The industry department is reportedly considering diluting the norms to sweeten the foreign direct investment (FDI) policy for the multi-brand retail sector, like allowing opening stores in cities with population of less than 1 million and relaxing the sourcing requirement of procuring 30% from the small and medium enterprises (SME). The Minister of Commerce, Anand Sharma also met Indian reps of Wal-Mart, Tesco, Carrefour and Auchan last week to allay their fears. He also clarified to them that though they have to seek the necessary permission from the state governments where they want to open stores, state governments cannot change the retail FDI policy.

But despite the notification last September, none of these retail chains have opted to open new Retail stores citing corruption, bribery and procedural delays as major deterrents, according to a report by Reuters. Incidentally, the wine industry has pinned their hopes that these chains will carry out the retail sales of wines if they follow the marketing policies in other countries,

Wal-Mart is already being investigated for breaking entry rules and bribery charges despite its stand that it is in compliance with India's foreign direct investment guidelines. No global supermarket chain has applied to enter because of regulatory uncertainty. ‘There are problems that are much larger than any individual or the changes he can quickly bring about," says an industry official. Wal-Mart's local joint venture partner Bharti, one of the few large-scale retailers in India, is getting cold feet because of the additional investment required to run retail operations too.

Two sources within the Indian unit of Wal-Mart in the US reportedly admit that it is unlikely to apply for its first retail store license before March 2015. The company has said it needs a further 12 to 18 months after winning government approval to open each store, which means its first retail outlet in the country would open in 2016 at the earliest.

Because of the strict US laws, Wal-Mart's current internal crackdown on bribe-paying has also slowed expansion plans in a country where paying bribes is seen as a standard cost of doing business, according to Indian retailers and industry officials. Reuters reported in May that retailers in India often pay so-called "speed money" to smooth the process of obtaining dozens of permits.

In November last year, the Indian JV, Bharti Wal-Mart, suspended employees including the CFO as part of an internal investigation into bribery allegations in India. More than 15 attorneys from the U.S. are reportedly working with the Indian business now to help strengthen compliance.

Whereas the small wine importers and producers routinely are obliged to ‘handle’ the government departments by shelling out speed money and thus adding to their costs and hence increased sales price (the increase is also magnified 3-5 times by the hotels while listing the wines), Wal-Mart has not been able to move ahead as it is illegal for the American companies to bribe even in foreign countries.

At its wholesale store in Andhra Pradesh, Wal-Mart has not sold fresh fruits and vegetables since October as it has been unable to acquire a license from the state Agricultural Produce Marketing Committee (APMC), according to a company source. Another wholesale store in Hyderabad is only open six days a week because it has been unable to secure a 365-day operating license, according to the report.

In both cases, according to the company source, the license has been held up because Wal-Mart won't pay a bribe."If you do not pay bribe, who will do your work in this country? Have all the government officials in India become honest overnight? Nothing has changed," the company executive told Reuters on the condition of anonymity. APMC and municipal officials have reportedly declined to comment.

Wal-Mart, which has run wholesale stores in India since 2009, has not opened a new store since October despite its stated plans to open eight in 2013. It has 20 such stores in India.

The wine importers, producers and the consumers can draw solace from the fact that our system perhaps does not differentiate between the small and the big guys and we have a true Federal democracy where the States work with independence and want their pound of flesh too as business ‘partners’. Unfortunately, it does not take away from the fact that the boom in wine Retail sales might have been be pushed back by a few years.